Domestic political determinants of the onset of WTO disputes

Abstract

Trade disputes are driven by domestic politics, and the onset of trade disputes are driven by changes in the leadership within states. We offer two stylized facts for explanation: Leader change leads to dispute onset, and the effect is greater in autocracies than in democracies. We develop a model that explains changes in trade policy and dispute onset induced by shifts in the sectors represented in government when leaders change. Democracies protect a wider set of industries at shallower levels than do autocracies. When leaders change in autocracies, new sectors enter the winning coalition, resulting in new deeper barriers that spark disputes. When leaders change in democracies, the change in the winning coalition is not as stark, and the depth of the shifts in trade barriers is not that large, resulting is a smaller effect on dispute initiation.

Keywords

Leader change Dispute onset WTO Regime type

We are grateful for the many useful comments we received when we presented versions of this paper at the 2013 American Political Science Association Annual Meetings the 2014 International Political Economy Society Conference and the 2015 Political Economy of International Organizations Annual Conference.

For a sector (say, 3) that is not in the winning coalition, the first order condition is\( -\frac {2}{3} d(t_{3}) + m(t_{3}) +t_{l} m^{\prime }(t_{3}) = 0\)whichreduces to (after substituting in the demand and supply functions)

The first order condition to the autocratic government’s problem for a sector (say, 1) in the winningcoalition is \(s(t_{1}) +\frac {1}{3} (-d(t_{1})) + m(t_{1}) +t_{1} m^{\prime }(t_{1}) = 0\).The same substitutions as above lead to

Analysis of the impact of complainant leader change

We consider the effect of leader changes in the complainant state, C. Such changes do not lead to a shift in R’s trade policy, but they can result in the complainant now wishing to complain about pre-existing policies. Tables 8 and 9 are similar in structure to Tables 6 and 7. Each table characterizes the level of protection leveled against members of C’s coalition under different configurations on political coalitions in C and R. However, instead of examining the impact of leader change in R, these tables each add rows to show the impact of leader change in C. While leader change in nation C does not alter R’s trade policy, it does however shift the interests that are represented in nation C and hence affects whether the new leader in C chooses to now protest against the pre-existing policies in R.

Table 8

Autocratic respondent: C’s policy disagreements with R and the impact of leader change in C

Referring to the first column of Table 8 in which autocratic leader R’s coalition is composed of 1, we see that the supporters of autocrat C are only harmed when these supporters are also based around sector 1. If leader change occurs in nation C and the new coalition forms around sector 2 (shown in the second row of the top panel of the table), then any preexisting dispute on issue 1 is likely to be resolved as nation C no longer cares about this issue. In contrast, if R’s coalition is built around sector 2, then the shift in C from coalition 1 to coalition 2 is likely to lead to the onset of dispute over sector 2. Such a dispute does not arise because of a change in the offending policy, but because political change means the respondent now wants to complain about R’s pre-existing policy. On average 1/3 of autocratic leader changes lead to new interests in the complainant’s coalition being harmed by R’s policies and the extent of this harm is high as R provides high tariffs, X.

The lower panel of Table 8 considers the effect of leader change when C is democratic. In parallel to the upper panel, 1/3 of leader transitions in democratic C lead to members of the new coalition being subject to the adverse effects of the R’s trade, and again R’s policies are maximally painful to those groups harmed. However, in contrast to the upper panel, a democratic C has multiple groups to worry about and so her response might be more muted compared to an autocratic C (hence the lighter shading in the lower panel of the table).

If R is autocratic, then leader change in C means that 1/3 of cases result in the onset of harm to C’s coalition members. Further, the extent of harm is high. These two effects are constant whether C is autocratic or democratic. However, because C must concern herself with the welfare of multiple groups when she is democratic, rather than a single group when she is autocratic her response to members of her coalition being harmed by R’s policies might be muted.

Table 9 examines the impact of leader change in C when R is democratic. The structure of the table is analogous to those considered above. Since R is democratic its trade policies are low intensity and so less likely to trigger dispute onset than when R was autocratic. In the upper panel, where C is autocratic, leader change leads to new coalition interests being harmed in 1/3 of cases. The comparable number when C is democratic (lower panel) is 2/3. A comparison of these rates at which new interests are harmed suggests that against a democratic respondent, leader change in a democratic complainant is more likely to lead to dispute onset than leader change in an autocratic complainant. However, this prediction is offset by the democratic leader having split attention as a result of having multiple groups in her coalition. While against an autocratic respondent we predicted that autocratic leader change in a complainant was more likely to lead to dispute onset than democratic leader change, in the case of a democratic respondent the results are ambiguous.

Appendix 2: Data and estimation

Disputes

The WTO provides comprehensive data on disputes.11 These data provide a list of disputants, the dates of dispute onset and a summary of the issues involved and the progress of the dispute through the WTO. The dependent variable is the occurrence of a dispute filed by C against R in a particular year. The long list has 334 dyad years in which a dispute occurs between 1995 and 2008. Following the lead of others, we create a short list of dyad years with disputes by collapsing related disputes into a single event. We use the Bobick and Smith (2013) extension (following the procedures of Hudec 1993) of the Busch and Reinhardt (2003) data which contains 321 dyadic disputes resulting in 268 dyadic years in which WTO disputes occur. Given their comparative rarity, approximately 1 in a 1000 cases, we use rare event logit procedures from Tomz et al. (2003). We use STATA implementation of these procedures which conveniently incorporate Clarify, a simulation-based approach that provides a convenient means for assessing the substantive impact of changes in variables (King et al. 2000).

The EU

Although not a member of the WTO in its own right, the EU typically represents the interests of its members at the WTO. In the data the EU is the complainant in 35 disputes. There are no instances in which individual EU member states initiate a dispute in the role of complainant. The EU, rather than an individual EU member state, is typically named as a respondent. There are 44 such cases in the data. However there are exceptions and cases occur when an individual EU member state is the respondent. For instance, in Disputes 67 and 68 (14 February 1997) the US complained about the classification of computer products by Ireland and the UK. In these disputes, individual EU member states were the named respondents rather than the EU itself. There are 13 similar cases in the data. We take a pragmatic approach to handling observations involving the EU. We create a pseudo-nation we call “EU”. With respect to economic indicators such as population and GDP we treat the EU as the sum of its constituent member states. We include the EU as a WTO member with respect to creating directed dyads. We exclude any dyad involving the EU in one role and an individual EU-member state in the other.

In the analyzes we exclude all dyads in which an EU member state is nation C, the complainant. However, since individual EU states are named as respondents, we include directed dyads that include EU member states as nation R, that is in the role of potential respondent.12

Leader turnover

For each nation in the directed dyad pair, we know the dates of leader changes. ΔLR is coded one if any national leader change occurred in nation R, the respondent country, in the current or previous year, and is coded zero otherwise. ΔLC is coded analogously for the complainant state. These data are taken from Change in Source of Leader Support (CHISOLS) (Leeds and Mattes 2013) dataset.

Political institutions

The theory emphasizes how institutions affect the breadth of support that a leader needs to secure in order to survive. We use the Bueno de Mesquita et al. (2003) measure of winning coalition size to capture institutions on exactly this dimension. WC and WR refer the coalition size for the complainant and respondent in each directed dyad.13,14 In unreported robustness tests, we have also used Polity’s democracy-autocracy store as a measure of the breadth of political inclusion and obtained similar results to those reported here.

Economic data

Population size, GDP, economic growth and trade as a percentage of GDP are obtained from the World Bank’s World Development Indicators (World Bank 2010). The analyzes include the year of dispute initiation to control for temporal trends. There is substantial temporal variation in dispute initiation. To account for this we include the variable Year, which is the calendar year minus 2000 in each specification. In addition to treating time as a linear effect we have used cubic specification and year dummies, which lead to similar results.

Results

Table 10 provides summary statistics of the principal variables in the analyzes. Table 11 replicates Table 1 for the short list of WTO disputes Onset.

Table 12 in Appendix 3 shows rare event logit regressions using both the long and short lists list of disputes. The models contain a basic specification that examines the impact of institutions and leader change in the presence of simple economic and demographic controls.

WTO disputes occur between large economically powerful nations, as can be seen by the large and significant coefficients on the population size and GDP variables for both complainant (ln GDPC, ln POPC) and respondent (ln GDPR, ln POPR). The impact of institutions and leader change examined in Table 2 were calculated using the first model in Table 12 with the population and GDP variables set at the 95 percentile (disputes are much more likely among rich, populous nations).

Nations with large winning coalitions are much more likely to initiate WTO conflict than those with small coalitions. The coefficient estimate on the WC variable is highly significant in all models and the substantive impact is large. For instance, in the short list, moving from the smallest to the largest coalition systems increases the relative risk of dispute onset by about 18-fold.

The impact of leader change on the risk of WTO dispute onset is contingent on political institutions. Generally we find that in small coalition systems, leader change increases the likelihood of WTO dispute onset. However, in large coalition systems, leader change either has little impact on the onset of WTO disputes or slightly decreases the risk of WTO disputes. The coefficient estimate on the ΔLC variable is positive and significant. In contrast, the coefficient estimate of the interaction of coalition size and leader change is negative. Leader change in a small coalition complainant increases the likelihood of WTO dispute initiation. Simulation of the size of the substantive effect suggests leader change in a small coalition increases the risk of dispute onset about 8-fold.

Leader change in respondent states increases the likelihood of dispute onset, as evidenced by the significant positive coefficient estimate on the ΔLR variable. The coefficient estimate on the interaction between ΔLR and WR is positive such that in the largest coalition systems -democracies- the impact of leader change is muted.

Robustness: EU and China

Table 13 is similar to Table 12 but with two distinctions. The first two models in Table 13 excludes all observations involving the EU and EU member states. The last two models in Table 13 excludes all observations involving China. The results are similar to those in Table 12 suggesting that the results are not driven by EU or China cases.

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